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Congress does a 180 on “Kiddie Tax”

Oct 19, 2020

The “kiddie tax” was established in 1986 to discourage people from avoiding taxes by shifting income to their children in lower tax brackets. It achieved this goal by imposing tax at the parents’ marginal rate on most of a child’s unearned income, such as interest or dividends from investments. Under the Tax Cuts and Jobs Act (TCJA), however, beginning in 2018 this income was subject to tax at the rates applicable to trusts and estates. Because the highest tax rates for trusts and estates kicked in at low-income levels (between $12,000 and $13,000), this meant that the kiddie tax rate was often higher than the parents’ marginal rate.

In late 2019, the Setting Every Community Up for Retirement Enhancement (SECURE) Act restored the pre-TCJA rules. The act also provided that taxpayers may choose between the TCJA and SECURE Act rules for the 2018 and 2019 tax years. If your children paid kiddie tax for those years, it pays to review those returns and amend them if the alternate computation would result in a lower tax bill.

Generally, the kiddie tax applies to children under age 19 (for full-time students, age 24) as of the last day of the tax year. It doesn’t apply to children who are 1) married and file joint returns, or 2) age 18 or older with earned income that exceeds half of their living expenses.

This material is generic in nature. Before relying on the material in any important matter, users should note date of publication and carefully evaluate its accuracy, currency, completeness, and relevance for their purposes, and should obtain any appropriate professional advice relevant to their particular circumstances.

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